NEW$ & VIEW$ (25 FEB. 2015): EU Deflation Accelerates

Yellen Puts Fed on Path to Lift RatesFederal Reserve Chairwoman Janet Yellen, sounding upbeat about the economy, started laying the groundwork for interest-rate increases later this year.

(…) If the economy continues to strengthen as the Fed anticipates and officials become more confident that low inflation will rise toward their 2% goal, she said, the central bank “will at some point begin considering an increase in the target range for the federal funds rate.”

With that assessment, Ms. Yellen took an incremental step, shifting the central bank away from promises that interest rates will stay low and toward a discussion of when and how fast they will move up. (…)

She repeated the promise of patience Tuesday, but this time she broached the idea of moving beyond it as well, saying that before rates increase, the patience assurance would be changed. (…)

“It is important to emphasize that a modification of the [interest-rate] guidance should not be read as indicating that the [Fed] will necessarily increase the target rate in a couple of meetings,” Ms. Yellen told the Senate panel.

Instead, she said, a change in the language would put on the table for discussion the possibility of raising rates after two meetings.

“The modification should be understood as reflecting the [Fed’s] judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting,” she said.

“There is this kind of talk therapy going on,” said Ethan Harris, chief economist at Bank of America Merrill Lynch. “She tells the markets not to worry about this and don’t worry about that. Today she told the market, ‘Don’t worry if we remove patience.’ ” (…)

It now seems that the deflation/inflation theme is taking over from the economy theme.

Deflation Threat Grows in EuropeConsumer prices across the European Union fell in January at the fastest rate since records began in 1997, increasing the risk that the 28-member bloc will slide into deflation.

Eurostat on Tuesday said consumer prices in the 28-nation bloc fell 0.5% in January from a year earlier, and confirmed data that showed prices in the eurozone were 0.6% lower.

Here’s the important breakdown that the WSJ did not even care to mention: ex-Energy, annual inflation declined to +0.4%; core CPI is +0.6%. Importantly, inflation ex-energy collapsed into strong deflation on a MoM basis: CPI ex-Energy was –1.4% in January. Core CPI (ex-Food, x-Energy) cratered –1.9% in January. These inflation gauges had been essentially flat since September.

A gauge of growth rates for raw materials including cattle hides, tallow, plywood and burlap has been signaling economic contraction since September. The last time the growth rate of the JoC-ECRI Industrial Materials Price Index was falling to these levels, the world was mired in recession. “The decline in commodity prices is consistent with a prolonged period of slow global growth,” Alan Greenspan, the former chairman of the Federal Reserve, said in a Feb. 18 telephone interview. “We may very well be accelerating in the months ahead, but evidence is hard to find in the data.” A major reason is slowing growth in China, the world’s biggest user of metals, grains and energy, and weakening economies across Europe. While demand suffers, output has surged for everything from oil to wheat, creating global surpluses that sent prices plunging.

Oil rises to $59 as Saudis say demand growingBrent crude oil rose to around $59 a barrel on Wednesday after data showed Chinese factories were producing more than expected and Saudi Arabia’s oil minister said oil demand was growing.

“Markets are calm now … demand is growing,” said Naimi, who was behind a change in the strategy of the Organization of the Petroleum Exporting Countries last year, when it decided not to adjust production despite a sharp fall in oil prices.

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